As part of an ongoing series, we talk to professional investors in the fintech space to get a feel for what’s on their radar screen.
This week’s guest on the Tearsheet podcast is Chris Sugden, managing partner at Edison Partners, a Princeton NJ growth equity firm that invests in companies generating revenues of $5 to $20 million. After 31 years in the business, Edison is on its eighth fund. Chris leads the firm’s activity in fintech and was previously an entrepreneur in the billing and payment space.
Sugden joins us today on the Tearsheet podcast to discuss the role growth equity plays in the fintech ecosystem. We get the lowdown on his firm’s portfolio which includes investments like early forex leader Gain Capital, vertical payments player PHX, and personal finance manager MoneyLion. Lastly, we talk about where Sugden and Edison are looking to make fintech investments in the future.
Finding a unique fintech proposition
At the growth equity stage, we’re thinking about the dogs eating the dog food. There’s a live product and we don’t need to make a lot of guesses about adoption. We do need to make guesses about execution and market size and whether this is a product or a company.
We think we’ve carved out something that’s unique in fintech. Growth equity is finally a thing, as it’s become an asset class over the past three or four years. Back in 2006, we called what we do “expansion capital”, but that was a bit confusing. All capital is for expansion. As we define it, growth equity is really a revenue filter — we look to invest in companies with revenue run rates between $5 million and $20 million. We also look for companies that haven’t raised a whole lot of money before we come in.
How does growth equity play out in fintech?
We find ourselves searching for areas where you can gain traction without a tremendous amounts of money. In many cases, that means avoiding spaces that get hyped up, like mobile payments. We’ve looked at a lot of mobile payment deals, but because of their platform nature and the fact that dual-sided marketplaces need liquidity to transact, they require a fair amount of capital. So, these deals tend to be trickier for us to find entrepreneurs who don’t need a lot of outside capital to get their revenue run rates going and growing.
So, in fintech, you’ll see us doing more enterprise-like deals targeting banks, brokerage, and wealth management, as opposed to consumer-type applications.
What startups need to understand about funding
The biggest lesson I’ve learned as an entrepreneur is that money can solve scale but doesn’t solve hard problems or create innovation. The pitch where an entrepreneur claims that if he had a little money, he could make a lot more revenue — well, that’s not really true at the smaller end. One of the biggest tests is what the money is going to be used for. Does the entrepreneur really understand the business model and the revenue levers? When I sit with an entrepreneur, if I don’t understand from them customer acquisition costs, lifetime value and gross margin and contribution margin, it tells you a lot about how the CEO will think about using capital.